Pitfalls of Poor Estate Planning: Top 5 Problem Areas to Consider

Pitfalls of Poor Estate Planning: Top 5 Problem Areas to Consider article image

Written by: Michele Procino-Wells, Esq.

Preparing an estate plan is often a bittersweet experience. On the one hand, you may feel gratified about the notion of leaving behind financial stability and security for your loved ones to rely upon. On the other, you may feel uncomfortable facing your own mortality and would rather quickly circumvent the estate planning process.

Both feelings are common emotional components of any estate planning process. However, what you should try and avoid at all costs – and trust us, it can cost you – is rushing through the process to the detriment of your family’s financial future. By not taking the time to carefully consider the best options for your unique situation, you could encounter depleted assets, difficulty paying for long-term care or burdening your loved ones with an insolvent estate. The following are common estate planning blunders which we urge you to avoid, as well as the possible dangers associated with each:

1. Joint Ownership: Be careful with titling assets jointly. Many times, assets are titled in the name of two or more people out of convenience sake, only to undermine an estate plan once one of those owners passes away. Regardless of the language of your estate plan, the surviving members of a joint ownership arrangement subsume your interest upon your death – which can result in unintended gifts of substantial assets.

2. Beneficiary Designations: Failing to routinely monitor and update your beneficiary designations can also undermine your estate plan. Much like jointly-titled assets, beneficiary designations on an IRA, 401(k) or life insurance policy trump the beneficiary designations in your will or trust. The individual you named as your beneficiary several years ago may not still be the person to whom you intend to transfer the asset.

3. Life Insurance Proceeds: An improperly arranged life insurance policy can result have disastrous consequences. At a minimum, your beneficiaries should be responsible, financial competent individuals who will not squander or misuse the proceeds. From there, you must take careful precautions to ensure the proceeds do not become part of your gross estate, which could lead to unnecessary taxation, inadvertent disinheritance of your intended recipient or unnecessary exposure of this asset to estate creditors.

4. Liquidity: Lack of liquidity in an estate creates problems for your executor or trustee. This problem occurs due to improperly funded trusts or leaving the bulk of your estate with joint owners or tied up in real property and other non-liquid assets. Many estates take up to a year or longer to settle and during that time your executor and trustees must arrange for the payment of taxes, debts, administration costs, and the maintenance of property– all of which are particularly difficult without access to cash.

5. No Plan at All: Probably the poorest of all poor estate planning practices is to forgo creating a plan entirely. You may have heard of famous celebrities dying “intestate” as a result of not having an estate plan in place. When a person dies without at least a simple estate plan in place, they expose their families to unnecessary expenses, conflict, and complications. They leave the fate of their estate up to state law to determine who will be in control of their estate and who will inherit their property.

Each and every one of the above pitfalls is avoidable through careful, thorough planning.